Monday, Sep 24, 2018 | Last Update : 12:35 PM IST

I am confident that H2 2017-18 will show solid recovery, says Arvind Virmani

Published : Oct 3, 2017, 1:40 am IST
Updated : Oct 3, 2017, 1:43 am IST

The government is looking at increased public spending to boost growth, with Finance Minister Arun Jaitley addressing CPSEs earlier this week.

File photo of senior BJP leaders Yashwant Sinha and Arun Jaitley after a BJP Parliamentary Party meeting in New Delhi. (Photo: PTI)
 File photo of senior BJP leaders Yashwant Sinha and Arun Jaitley after a BJP Parliamentary Party meeting in New Delhi. (Photo: PTI)

What are the reasons for the current slowdown? And do you believe that it is temporary or long term?
There are three sets of factors. Those arising from the world economy since 2009-10 and our inadequate/misplaced policy response to it, those arising from policies over last 1 to 3 yrs and demonetization & GST. The demonetization effects and some of the negative external developments and the effects of double drought are over. Some of the policies like tight monetary policy remain. Over all I expect growth to bottom out in either Q1 or Q2 of 2017-18 and to rise thereafter.

Former finance minister Yashwant Sinha has said in an article that government missed a good opportunity afforded by low crude oil prices and did not use the extra finance available to it, to revive the economy?
The response to such developments is best evaluated by what happens to the fiscal and revenue deficits. The government has stuck to the declining fiscal deficit path proposed by the Finance Commission, so this positive. However, they could have reduced the revenue deficit at a slightly faster pace. The decline in oil prices has been fully mirrored in the decline in current account deficit from dangerous levels.

As system adjusts to GST do you see growth coming back and most importantly how do you see second quarter GDP numbers? How long do you expect the impact of GST to tamper off?
Because of excessive & narrow focus of the GST council on short term revenues, the GST has become much more bureaucratic and complex than it could have been or should be. This puts a little uncertainty in the analysis of past data, which suggests that GDP has bottomed out in Q1 of 2017-18. A slight further slowing of GDP growth in Q2 2017-19. because of GST compliance costs cannot be ruled out. But I am confident H2 2017-18 will show solid recovery.

Government is talking about financial package. But there are other analysts which are warning against move which will breach fiscal deficit target. Your view on it. Is it time to look for growth and forget about deficit target?
Fiscal deficit is an outcome of expenditure, tax and Public sector policies including privatization/ disinvestment. Growth can only be increased by tax reforms that simplify GST, import tariffs and export duties and income tax-subsidy systems. If these increase fiscal deficit in the short term it is acceptable. Similarly a fiscal effort to reduce leakages and corruption in consumption subsidies and shift the money saved to capital and infrastructure investment, will accelerate growth. A rise in fiscal deficits arising from faster growth of capital expenditures is also acceptable. Similarly, privatization of loss making PSUs and PSBs will reduce Fiscal deficit and enhance productivity/GDP growth after transition costs are over.

Many observers also blame RBI for not cutting interest rates more aggressively or slow down. Present chief economic adviser has said that RBI has over-estimated inflation and been slow to cut interest rates?
As a member of the RBI technical advisory committee (TAC) on monetary policy I had repeatedly argued that RBI was overestimating future inflation and consequently keeping monetary policy too tight, thus harming growth. These warnings have been clearly proved correct in the last 18-24 months. Consequently real interest rates are too high, hurting construction. HH investment in dwellings and buildings and manufacturing.

Do you see a scope for more rate cuts by RBI since inflation is rising?
With a projected end year inflation of 4%, inflation is expected to be right on the target mandated for the RBI. Consequently RBI's Repo rate should be set to its neutral level, which under current global and domestic conditions is 0% to 1%. Therefore the RBI Repo rate should be reduced to the 4% - 5% range.

What are the reasons that private investment is not picking up and what should be done to help in this direction?
Besides the global excess capacity created by continuing over-investment by non-market China, the main reason for the decline in India's investment rate since its peak in 2007-8 is the decline in Household (unincorporated enterprises) investment  in Dwellings and Buildings. The reasons for this are (a) the contradiction between the Union Government's measures against corruption and Black money and the continued LPQ raj in States' Land and Real estate policy, rules and procedures and consequent corruption (b) deflation in construction and housing/real estate which reduces expected return on investment, (c) high real interest rates and (d) policy, regulatory uncertainty in selected sectors. The problem raised in (b) is almost over. Policy solutions for each of the other causes are inherent in the analysis.

Will rising inflation and Current Account Deficit result in a bigger headache for the government?
Rising current account deficit is not an immediate problem but a warning and an opportunity to reform EXIM policy with respect to agriculture and to reform import tariffs and export duties to promote Indian entry into global supply chains through which most manufactured exports now take place. This is also an apposite time to tweak EPZ policy to facilitate the shift of Labor intensive manufacturing from China to India.

Exporters and SMEs have been impacted by demonetization and GST jitters. What could be done to revive them.
The best way to support SMEs is through a dramatic simplification of the GST:
This includes the elimination of new bureaucratic procedures relating to intra-state transport of goods and inter-state supply of services, excessive reporting requirements, multiple rates on single/similar goods and services and single rate on all goods and services that are inputs into production. The GST policy on exports is and must be changed to one used by 99% of countries with VAT/GST systems of indirect taxation.

What reforms at this juncture should government take to help the economy?
Besides the reforms listed above, the Bankruptcy law and NPA resolution should be expedited, agriculture trade and stocking decontrolled to promote jobs, education controls replaced by modern regulations to reduce the outflow of students abroad, and medical tourism visa system stream-lined in co-operation with approved hospitals.

GDP growth was at six percent in Q3 2014-15 and peaked at 9.1 percent in Q4 that year. The lack of reforms and policy mistakes led to a decline in GDP over the last six quarters and 5.7 percent for the second quarter of FY 2017-18 is the slowest since the Modi government took power.
Investment has dropped below 30% of the GDP. Industrial growth is at a five-year low, investment actvity has dropped below 30% of GDP
IIP: Growth in the first quarter of FY 2017-18 plummeted to 1.2% from 4,5% a year ago, bogged down by the lingering effects of demonetisation and the GST rollout.
Factory output measured in terms of Index of Industrial Production declined by 0.2 percent in June.
Manufacturing: Makes up 77.6% of IIP. Decele- rated sharply to 0.1 percent in July 2017 compared to 5.3 percent in the same period in 2016.

CPSEs to push capital expenditure
The government is looking at increased public spending to boost growth, with Finance Minister Arun Jaitley addressing CPSEs earlier this week. Heads of major CPSEs in sectors like petroleum, defence, power, road transport, railways, coal, mines, steel and atomic energy have assured the government of raising capital expenditure by an additional Rs 25,000 crore.

India growth outlook lowered to 7% for 2017-18
The Asian Development Bank has slashed India's GDP forecast to 7 percent from 7.4 percent, owing to weakness in private consumption, manufacturing output and business investment. However, the Asian Development Outlook 2017 remains bullish on growth gaing traction on reforms. Private consumption is expected to pick up on the back of low inflation and anticipated wage hikes. Manufacturing is also likely to bounce back as the sector adjusts to the new tax regime.

Tags: demonetisaiotn, yashwant sinha, gst